Five years ago, Larry Kasanoff corralled one of his colleagues, put him in his car, and said, "We're going to drive around Santa Monica until we come up with an idea for a movie."

It turned out their inspiration was a supermarket. What if the products on the shelves all came alive at night after the people had left the store? The result is Foodfight!, and if you have kids, it's a good bet you'll be watching it next summer. (Sneak preview: Charlie the Tuna, Mr. Clean, and a host of other Madison Avenue characters battle a mysterious interloper, Brand X. And yes, the product placements are bought and paid for. Welcome to the future.)

But the movie's plot is less important than its business model. Threshold Entertainment, Kasanoff's shop, is just one of a bunch of ambitious new players trying to piggyback on the spectacular successes of Pixar and DreamWorks. They want to make computer-animated feature films for family audiences, too, but they're looking to do it on an entirely different scale: smaller, cheaper, faster.

In a way, like many savvy business types, they are opportunists. They saw a niche in the market, and they hopped in. The end result, however, could be something considerably larger—and rather disturbing for the old guard. "Contrary to what people think," says Kasanoff, "Hollywood is not an innovative place. It's the biggest sheep farm east of Auckland."

The game has changed profoundly since Ralph Guggenheim, CEO of Alligator Planet, another small animation studio in San Francisco, produced Toy Story for Pixar in 1995. For one thing, the technology for digital animation has gotten a lot cheaper—and better. A decade ago, Pixar had to hire techno-whizzes who wrote their own software to create computer-generated images with an unprecedented 3-D look. Each animator worked at a $50,000 computer workstation. Today, anyone can buy affordable 2-D and 3-D software packages such as Maya and

Softimage, which are taught to rising young talents in art schools everywhere. Guggenheim calls that off-the-shelf software the new "lingua franca" of animation. It's capable of creating the kind of visual effects that Pixar's brain trust could only dream of back in the early days—and it can do so on an Intel-Microsoft PC that goes for around $5,000 "and runs circles around what we had."

As Kasanoff puts it, "Animation is the only part of film production where quality is going up while costs are going down." What's more, kiddie cartoons are the sweet spot of the industry. While the average feature film produces $33 million in U.S. box-office receipts, the average for family films is $90 million. The figure is an astonishing $225 million for digitally animated films.

Janet Healy bet her career on this trend. As an executive at Industrial Light & Magic, Disney, and DreamWorks, she has worked with such Hollywood legends as George Lucas, Jeffrey Katzenberg, and Steven Spielberg. Now she works for a guy named Howard Jonas. He made his money in the prepaid calling-card business, and his company, IDT Entertainment, is in Newark, New Jersey, which sure ain't Beverly Hills.

It may not be glamorous, but there's one way to make up for that. "The risk is low, and the upside is amazing," Healy says. Consider IDT's deal to produce four computer-animated features for distribution by Fox. The productions will cost only $25 million to $50 million apiece, versus the $100 million or more for your traditional animated blockbuster. "Even if a film does moderately well"—say, $50 million to $60 million at the domestic box office—"that's still a huge win," she says. Especially since far more revenue, running into the hundreds of millions of dollars, tends to come from international rights, merchandise licensing, and DVD sales.

Another factor abetting the software revolution: a flood of cheap labor, which can be either assembled in one place on a per-project basis or networked via the Internet. "There's a growing pool of high-quality animators around the world," says Guggenheim. They're fluent in the same software their American counterparts are using, and producers can tap talent anywhere on earth. What's more, many governments offer financial incentives for film production, a form of cross-cultural competition that will only lower production costs further.

While Pixar itself may still evoke the old-fashioned notion of a movie studio—with hundreds of full-time staffers working together at its loftlike headquarters in Emeryville, California, near Berkeley—its successors function as temporary, global, virtual studios. Guggenheim will produce Alligator Planet's next film from his home in San Francisco; his director will remain in his own native Australia; and they're trying to decide whether to hire an animation team in Mumbai, Toronto, or France.

This isn't the end of Hollywood, of course. IDT, for example, does its scripting and storyboarding in Los Angeles, which has an unmatched concentration of writing talent, then exports the laborious frame-by-frame execution of the animation itself. (IDT actually bought two studios in Canada, which offers big tax benefits, to fill that role.)

Vanguard Animation took a similar approach for its animated feature, Valiant, about a pigeon in World War II. Vanguard did the early creative work in L.A., then gathered 200 people from 17 countries in the UK. Wild Brain, which has a deal to produce feature films for distribution by Disney, has long tapped animators in China, India, Malaysia, and South Korea for Higglytown Heroes, its series on the Disney Channel. And Threshold's Foodfight! was created by 100 animators working in Australia, Europe, and South Korea, along with two dozen in L.A. "What do we care if a guy is in Van Nuys or India?" says Kasanoff.

"Everything in this globalized market is about finding the best place to get things done at lower costs," says Guggenheim. "I can't tell you how many people have said to me, 'We want to build the next Pixar in . . . blank.' The studios we deal with are like call centers but with very talented artists. The next Pixar isn't going to be a big building in Emeryville. It's going to be groups around the world, networked together."

Cheap software and cheap, interconnected labor make possible another radical assault on the status quo. By lowering the costs of production, they enable the little guys to hold on to their intellectual property, rather than ceding it to the studios.

For decades, Disney, Fox, Universal, and the rest have played three main roles: They financed the making of the films, got the movies into cinemas around the country, and paid to advertise and promote them. And even though they sometimes spread around pieces of the revenues, they tenaciously held on to copyright ownership. Those rights accumulated over the years into collections of intellectual property, libraries of hundreds of films, worth billions of dollars because of their licensing potential. So, essentially, the studios have served as bankers, marketers, and owners.

Then came Pixar and Steve Jobs. When Pixar made Toy Story, it received just 12.5% of the film's revenue. Emboldened by the film's success, Jobs subsequently renegotiated his deal so that Pixar and Disney would split the box-office receipts for Pixar's next five movies. But with the jaw-dropping performance of that six-film run—and now that Pixar's deal with Disney has run its course—Jobs is taking no prisoners. He has insisted that in any future deal, with Disney or any other studio, Pixar will finance the films and retain the copyright, while its partner would receive a mere single-digit percentage of revenues as a distribution fee. In other words, now Pixar will be the banker and owner; the studio, simply a marketer.

It was one thing for Jobs to demand this kind of deal. Pixar may have toiled away invisibly for nine years before producing Toy Story, but the company now arguably has the best track record in Hollywood's history, and its success allows it to underwrite a $100 million-plus production. But how can the largely unproven next generation come up with the cash required to assert similar control?

Astonishingly, the low-risk, high-reward potential of digital animation has generated tremendous interest in investors far from Hollywood. Phil Knight, cofounder of Nike, recently bought Will Vinton Studios, the animation house in Portland, Oregon, where his son worked. Knight renamed it Laika (after the 1950s Soviet cosmo-dog) and bankrolled it to make animated feature films. And "there's an enormous amount of money in Asia to produce animated motion pictures in the $25 million to $50 million range," says Ellen Goldsmith-Vein, who runs the Gotham Group, a management company for many of the top writers, directors, and producers of digital animation. Taiwan's Digimax, for example, has committed financing for her low-budget animation flicks.

So relatively low costs and potentially huge payoffs are gradually readjusting the balance of power in intellectual property—at the expense of the big studios that have always been Hollywood's power brokers.

"It's very important to us to own the negative," says Kasanoff. Threshold began financing Foodfight! with help from a South Korean investment consortium, the idea being that it would then find a Hollywood studio to serve as distributor. "Many studios wanted the movie, but they all insisted on owning it," Kasanoff says. Lions Gate ultimately signed on to distribute the film—and actually agreed to let Threshold retain the copyright. How did Kasanoff pull it off? "You make them such a good offer that they just have to do it," he says. "So much potential money to make and so little risk." For one thing, Threshold is cutting Lions Gate in on the film's merchandising deals.

"Intellectual property rights—that, frankly, is the essence," says Vanguard's founder John Williams, who produced Shrek and Shrek 2, both owned by DreamWorks. For an upcoming animated film that Vanguard is producing, with Fox distributing, Williams says, "We've held back all the merchandising, licensing, and video-game rights. If and when we get a significant franchise"—a film with lucrative sequels, such as Shrek or Toy Story—"we'll own those rights. The intellectual-property rights are the treasure trove."

One big variable remains: Will these movies actually be worth watching? "There is a belief that the quality of a $25 million or $50 million animated movie is going to be as good as one that's $125 million or $150 million," says Gotham Group's Goldsmith-Vein. "But that remains to be seen." Say this, though: Mr. Clean and Charlie the Tuna are pros—and they don't haggle over residuals.